A SAFE
note is a form of a convertible security. In other
words, it’s something paid for now that turns into something different later.
In the context of SAFEs, that something now is an agreement between a company
and investor, and that something later is equity. It’s right there in the name:
“SAFE” stands for Simple Agreement for Future Equity.
A SAFE note can be thought of as a contract between
an individual or company (issuer) and another party (investor). The SAFE
investor invests capital upfront in exchange for agreed-upon future shares with
voting rights at some point in time to come when the SAFE matures – typically
three to five years from.
The SAFE issuer agrees to give the SAFE investor a
predetermined equity stake at maturity. The SAFE note caps how much of an
interest in the company can be given to investors, and is typically set at 15%.
SAFE notes are popular for their flexibility and
simplicity. SAFEs can be structured to have a pre-agreed upon share price, or
they may also include provisions that adjust the equity stake based on the
company’s performance over time.
How
does a safe note work? SAFE notes are also a popular tool for startups
looking to raise capital and meet their equity needs. SAFEs have advantages
over similar instruments such as convertible notes in that they provide an
investor with the opportunity to convert into equity at maturity rather than
having to wait until after the company goes public or is acquired.
SAFE also has a lower cost of capital and provide
the company with more certainty around an investor’s commitment to them. SAFE
notes are traditionally used in conjunction with safe
note cap, which set the equity stake per investment
at 15%. SAFE caps can be adjusted up or down depending on how much equity is
desired by investors.
SAFE
notes are typically structured with a set maturity date of three to five years.
SAFE is an acronym standing for Simple Agreement for Future Equity and SAFEs
are agreements between investors (the SAFE holders) and companies (the SAFE
issuers). SAFE can be structured to have a pre-agreed upon share price or they
may also include provisions that adjust the equity stake based on the company’s
performance over time.
